Trump's Impact on the World: Christina L. Davis on Trade

November 16, 2018

Harvard Professor Christina L. Davis discusses President Trump's strategies on trade—some of which may not be as outlandish as many people think.

This is the first blog post in a series of edited transcripts from a panel on Trump's presidency held during our orientation in August 28, 2018. Our three panelists were Christina L. Davis, Melani Cammett, and Timothy Colton.

Since the panel took place, Mexico, Canada and the United States reached an agreement to restructure and revamp the North American Free Trade Agreement. Now renamed the United States-Mexico-Canada Agreement, or USMCA, the trade accord includes, for example, some help for the US dairy and drug industries, stricter protections for autos made in North America, updated intellectual property rights, and improved labor rights and environmental protections. Legislatures of all three countries must ratify the new deal.

This transcript has been edited for length and clarity.

Talk delivered by Christina L. Davis:

It’s another interesting day in the study of trade.

I still don't follow Twitter, but I do check the news before I come to talk about trade. I think we're in NAFTA, but just barely, today. So the latest news is the US supposedly has some deal with Mexico. They're going to tell Canada, you can join, or you don't have to. And we're ripping up NAFTA. And this will be the best trade deal ever.

It's really amazing studying trade policy because this is one area where Trump has been fairly consistent. Since the 1980s, Donald Trump has been anti-trade. And it's also one of the areas where he's delivering beyond the rhetoric.

He campaigned very strongly against trade, and he is delivering against trade. First day in office, he pulls out of the TPP. The Trans-Pacific Partnership was the biggest new gold standard that the United States had been negotiating with East Asian countries for a free-trade agreement that imposed the US rules to raise standards for what we wanted in free trade—hoping that this would pressure China into changing its policies.

First act in office, President Trump pulls out. OK, that could still be rhetoric. But now, we see that he's also raising the stakes. We are in a trade war with China.

The United States has done everything from using the 2-3-2 tariffs to raise on specific goods like steel and aluminum to much broader range—$50 billion of trade goods with tariffs up, and China retaliating in kind with an equivalent amount of US exports to China now subject to tariffs. So we are actually in a full-out trade war. And as I said, it appears NAFTA is one step closer to unraveling or restrengthening, depending on which way you want to cut it [Editor’s note: NAFTA has since been dismantled and recast as the United States-Mexico-Canada Agreement].

So it sounds really grim. You could actually say he's brilliant. And I don't mean Trump himself saying he's brilliant. I mean we as scholars could look at this and say it's good old negotiation tactics.

You know, the trade system relies on continual renewal. You have to change the rules to keep up with the change in economy. And so the last time we changed the trade rules was 1995, when the World Trade Organization (WTO) was established.

And since 1995, a lot has changed. Digital services are really important. Integrated production means that you really need tough intellectual property rights, or else your firms are going to find their ideas stolen.

And, of course, yes, China entered the WTO in 2001 with a pretty hefty lowering of tariffs. But that was seventeen years ago. So maybe China needs to lower its tariffs again.

The argument that we need to revisit the trade system is a good one. And all of the countries tried to revisit the trade rules in what was called the Doha Round. It ended with no agreement because basically China, Brazil, India, and most of the world said, ‘we're OK with the way things are.’ And so there wasn't any serious negotiation.

It's really tough when you've got 160-plus countries to reach agreement. And if all think the status quo is still an option, they're not engaging with the same level of, ‘OK—where can we put something on the table?’ So the effort to revise the rules failed.

And here's where Trump's strategy can look brilliant… You know, he's basically saying, ‘look, the WTO, I'm willing to destroy it, and I'm willing to raise tariffs to new levels.’

And if it works, it will bring the other countries back to the table. And we'll see China engage in a new round, where China is willing to say their growth depends on open trade, and therefore, they’re willing to reform some of the policies that the United States has problems with—you know, state-funded banks giving unlimited subsidies to industries, no transparency over those subsidies. And we could go on about the various issues that could lead to a serious negotiation.

So we've got to give credit that there's a possibility that all of this rhetoric will actually lead to a positive outcome. And I like to hope….We also need to realize that the rhetoric in the news makes it sound terrible. But others have taken this policy before.

What happened in 1971? I was born. Starbucks was born. But what else happened in 1971? Calling all trade geeks!

The Nixon shocks—10 percent tariff surcharge on all goods, all countries—makes Trump look small. Yes, we can say it's 25 percent on steel, but that's nothing. To pull the US off the dollar standard and to raise a 10 percent tariff surcharge was huge.

And that was all about ‘let's shake up the trade system.’ The US has a problem with a rising deficit and needs other countries to reengage. And they did reengage, so we didn't see the end of the world trading system.

We saw a shift in the way currency arrangements were managed. We saw new trade negotiations started, and a strengthened system came out of that process. So it's possible.

And Trump is also not the first to play with tariffs. The safeguards he started on washing machines and solar panels…50 percent, I got hit with that. I moved in, and the first thing in my new house that broke was the laundry machine. So I repaired it instead of buying a new one.

Just not fair, right? That's just not fair.

Trade comes home. But that safeguard that Trump put on washing machines and solar panels was the exact same global safeguard that President Bush had used in 2001. Because President Bush also played politics—he went on campaign saying, ‘I'm going to help you steelworkers.’ And he came into office and raised a safeguard on steel.

And he played through the politics. When it was ruled a violation, he took down the safeguard. As we know, our steel industry still struggles, but he played the game.

So Trump may be just another strategist in the tradition of Nixon and Bush, playing politics both for home audiences and for bringing other countries to the table. And I hope that is true. But let me say why we have some reason to be a little concerned.

When President Nixon—with the Nixon shocks—rattled the system, he was also holding out the hand of ‘let's negotiate a new one.’ When President Bush imposed the steel safeguard on steel, he said, ‘we need to deal with this global surplus of steel,’ and when the violation ruling from the WTO said ‘your steel safeguards don't follow the law,’ he revoked it.

I'm a little concerned that the Trump administration is rattling the system, while saying the system is awful and the effort to reengage is not strong enough. He’s also rallying against the rule of law in ways that make it unlikely that when there is a ruling against US policy, we will just simply say, ‘OK’ and withdraw the tariffs.

So there's some reason for concern. There's also the concern that the justification for the trade protection—especially when he links national security to trade—is dangerous in the trade system because the trade rules try to recognize we want free trade. It brings growth.

But we all need exceptions because we all have domestic politics. So say some industry has been hit too hard; we need a temporary safeguard. Or for national security, we actually need to do something.

But you need to have the right balance so that you don't abuse those systems. And when Trump came in and said that steel and aluminum imports are threatening US national security, and next month we're likely to find that automobile imports threaten national security, he's pretty much opening the floodgates that any country can define anything as reason for protection. And that is very dangerous.

My own research started out on Japanese agricultural policy. I can tell you, I have heard a lot about how food self-sufficiency is part of national security in Japan and how importing rice could threaten Japanese national interest. They've got a good case.

I mean, if rice is your lifeline, you don't want to depend on the world for imports, and you need to protect self-sufficiency in rice. If the US can say steel and aluminum and autos, Japan can surely say rice. And pretty soon, every country can choose their favorite industry, and the trade system will collapse. And so that is where the use of that particular exception in the rules for this industry is really going to be damaging.

It is also difficult when he's threatening the system as bringing bad deals because he's rallying other countries to also feel that the system is not in their interest. The US isn't the only country that has domestic politics. It’s going to be very difficult for Canada to just back down and come to the table when there's been so much personalized rhetoric. And it will be difficult for China, which has its own domestic political contentions, to back down and offer a concession.

No matter how much the economic interests might line up and say an overall agreement is in the interests of Canada for NAFTA or China to reengage and bring about a new multilateral trade round, their domestic politics are getting stimulated by all of the harsh rhetoric. I worry they won't be able to make those concessions. And so that is why I go back and forth between brilliant strategist and worrisome antagonist.

It all ties in to my own research. And so wrapping up quickly, how does this connect to my research? I came to Harvard in 1989 and wrote my first college paper on why Japan protects its rice market.

Then with the help of WCFIA Program on U.S.-Japan Relations Associates, I learned about Japanese agricultural policy. A visiting scholar helped to read many chapters of my dissertation on agricultural trade negotiations. So the WCFIA very much was part of developing my research on how did we go from protecting agriculture to liberalizing agriculture and to my first book, Food Fights over Free Trade.

It is remarkable now, after having studied how US pressure and trade strategies led the US and Europe to liberalize, that now, of course, we've flipped tables. And Japan stands out as the leader of the free-trade system. They are the only country that has not—I shouldn't say the only—they have not retaliated against the Trump tariffs.

And so Europe and China have sort of been tit for tat, and they contribute to the problem of unilateral retaliation. It's almost as bad as the Trump policy of retaliation. Japan has stood back and said, ’you're raising tariffs, but we're not retaliating.’

Japan has pushed forward on the Trans-Pacific Partnership agreement and welcomes the US to join, welcomes China to join. So Japan is now actually at the forefront of pushing forward free trade. And that's very exciting to see, that they're embracing the global economy fully, which reflects on how trade has served Japan from nineteenth-century Meiji development to contemporary Toyota as a world-leading auto manufacturer. Japan has been able to see the benefits of the trading system, and one could hope that that would be an example others will follow.

I've also written a book on adjudication, which says countries should keep their trade fights within the law because then they can show the significance of the problem but try to keep it within a restrained timeline and bring other countries in as coalition partners. I don't think Trump read my book!

He also didn't read my article that I wrote about how the trade rules helped countries in the Great Recession pull back from a trade war. You know 2007–2008 was a really bad time for the global economy. And yet we didn't go back to the 1930s with tit-for-tat retaliation, even as countries had really hard economic times.

And that was because they sort of got together, reassured each other that if we all follow trade protection, it's going to only make things worse. So in the midst of a recession, borders were relatively open. The concern now is the global economy is looking pretty good. But if you destroy the trade system now, when the next recession hits, we're not going to have all those multilateral fora.

We're not going to have that robust system of rules, and the next big recession will actually lead to the repeat of the 1930s, where it's straight into full tit-for-tat retaliation. Anyway, I'll keep trying to balance my hat...as I write an occasional op-ed, and as I write research that President Trump will not read.

Weatherhead Center Faculty Associate Christina L. Davis is Susan S. and Kenneth L. Wallach Professor at Radcliffe Institute and Professor of Government in the Department of Government. Her research encompasses politics of international trade, foreign policy of East Asia and Japan, geopolitics and international organizations.

Photo

1. Image of Christina L. Davis, taken at the Weatherhead Center Orientation panel on August 28, 2018. Credit: Lauren McLaughlin